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The Bank of England Gold Sale Fiasco

May 9, 2019

Pat Heller

This month marks the 20th anniversary of the decision by former British Chancellor of the Exchequer Gordon Brown to sell the majority of the British government’s gold reserves, a process that took two years.

At the time, we predicted that this action would be a fiasco. History has proved us correct. The Bank of England converted most of its ounces of gold in their reserves into British pounds. At the end of May 1999, the pound was worth about $1.61 US. Today the pound is worth just under $1.31 US, so the assets received from the sales have lost almost 19% in value.

On the other side, the Bank of England realized an average price for the gold it sold of $250-270. The average gold price since the end of its gold sales in 2001 has been almost $1,000 and is about $1,280 right now, around 400% higher (not reflecting the impact of inflation of the money supply).

There was a major indicator that the British gold sales were done for purposes of suppressing gold prices rather than for any legitimate financial purposes. That sign was the manner in which the Bank of England sold the gold. It announced large quantity sales in advance to be sold on individual specific days. This guaranteed that the gold would be sold for the lowest possible price.

The Swiss government also sold about half of its gold reserves over a time period that partly overlapped the British sales. At the time, the Swiss had about $4 worth of gold reserves for every $1 worth of outstanding Swiss currency. It was able to maximize the gold selling price by quietly spreading out sales into small quantities at a time, and not announcing that the sales had occurred until well afterward.

On September 26, 1999, at the annual meeting of the International Monetary Fund held in Washington, DC, another major effort to suppress the gold price occurred with the signing of the Central Bank Gold Agreement (originally called the Washington Agreement on Gold). The then 11-member central banks of the European Central Bank, the European Central Bank itself, plus central banks of Sweden, Switzerland, and the United Kingdom signed this agreement and several other central banks also agreed to abide within the terms of this agreement. The agreement was to limit combined central bank gold sales to no more than 400 tons (12.86 million ounces) per annual period (September to September). Although this might appear to limit gold sales, the amount was so large of an apparent influx of supplies on the market that it did hold down gold prices for several years–until central banks were eventually unable to sell anywhere close to the agreement’s annual limit.

In the years since then, global central bank gold purchases have far exceeded sales. In 2018, for instance, central banks reportedly purchased 651.5 tons of gold, the most since 1967 (although the correct total is almost certainly much larger since China’s pattern is to underreport its gold purchases). In the first quarter of 2019, the World Gold Council reported that the 145.5 tons of gold purchased by central banks was the highest for that quarter in six years.

Although the gold sale pushed by Gordon Brown was a financial catastrophe for the British government and the Bank of England, it didn’t hurt Brown’s political career. He served as Britain’s prime minister from 2007-2010.